Hey guys, I’m Bette Hochberger, CPA, CGMA. For today’s quickie, I want to discuss tax credits. These can be a great way to reduce your tax bill and put more money in your pocket, but they can be confusing if you’re unfamiliar with how they work. So, let’s go ahead and get started—keep reading!
What Is a Tax Credit?
A tax credit directly reduces the amount of tax you owe to the government. So if you owe $1,000 in taxes and you qualify for a $200 credit, you’ll only need to pay $800. It’s a dollar-for-dollar reduction, which makes this one of the best ways to lower your tax bill!
Tax Credits vs. Tax Deductions: What’s the Difference?
It’s important to know that tax credits and tax deductions are not the same. While a tax credit reduces your tax bill directly, a deduction reduces your taxable income. For example, if you earned $50,000 and had a $1,000 deduction, you’d only pay taxes on $49,000. Deductions reduce your taxable income, while tax credits directly reduce what you owe.
Types
Now, there are two main types: nonrefundable and refundable.
Nonrefundable
These can lower your tax bill, but they can’t give you a refund if you don’t owe any taxes. For example, if you owe $500 in taxes and have a $700 nonrefundable tax credit, you won’t get a refund for the extra $200—the credit just brings your bill to zero.
Refundable
On the other hand, these can result in a refund even if the credit is larger than what you owe in taxes. If you owe $500 and have a $700 refundable tax credit, you’ll not only cancel out your tax bill, but you’ll also get $200 back as a refund.
Common Tax Credits You Might Qualify For
Here are some of the most common ones people may be able to claim:
Earned Income Tax Credit (EITC)
This one is for low- to moderate-income earners. The amount you can claim depends on your income and number of dependents. If you qualify, this one is also refundable, which means you could get money back even if you don’t owe taxes.
Child Tax Credit (CTC)
This credit is available for parents or guardians of children under the age of 17. It can reduce your tax bill by up to $2,000 per child, and part of it is refundable.
American Opportunity Tax Credit (AOTC)
This is for eligible college students or their parents. It offers up to $2,500 per year, and 40% of it is refundable.
Lifetime Learning Credit (LLC)
This can help with education costs for undergrad, grad school, or job skill development, offering up to $2,000, though it’s nonrefundable.
Saver’s Credit
If you contribute to retirement accounts like a 401(k) or IRA, you might qualify for this, encouraging retirement savings.
Energy-Efficient Home Improvement Credits
If you’ve made energy-efficient upgrades to your home, such as installing solar panels or energy-efficient windows, you could qualify for a credit to help cover the cost.
Electric Vehicle (EV) Credit
If you bought a qualifying electric or hybrid vehicle, you might be eligible for a credit, which could potentially reduce the cost by up to $7,500.
How Do You Claim Tax Credits?
Claiming these usually involves filling out the proper forms when you file your return. For each one, there’s typically a specific form to fill out, and you’ll need to provide documentation to show that you qualify. For example, to claim the EITC, you’ll need to meet income and filing requirements.
How They Can Benefit You
Tax credits can make a big difference when it comes to how much tax you owe. They can significantly reduce your bill and, in some cases, even result in a refund. If you’re unsure whether you qualify for certain ones, working with a tax professional can help you find opportunities to save money.
They are a powerful way to reduce what you owe on your taxes and can lead to significant savings. Whether it’s credits for families, education, energy efficiency, or retirement savings, it’s worth checking if you’re eligible. To maximize yours and make sure you’re taking advantage of every opportunity, schedule a meeting with us, and let’s get your tax planning started today.
I’ll see you all next time!
